Wall Street. A term that designates not only a physical place, but a symbol, a way of thinking. It’s the capital of investing (embodied in the stock market), the capital of high finance (embodied in the banking system), the capital of… capital. It’s the hub of the economy, domestically and internationally.
And it’s the single biggest stumbling block in the Obama administration’s attempt to get the economy back on track.
Wall Street’s era of global dominance may well be over for good. At the very least, its era of freewheeling, unregulated, devil-may-care profitmaking is certainly dead and gone. Yet the Street (to the extent it can be said to have a collective will) is still acting as if it’s calling the shots.
The buzz lately is all about nationalizing failing banks. Economists from Paul Krugman to Alan Greenspan, public officials from Chris Dodd to Lindsey Graham, are all saying that it’s the only sensible approach to resolving the problems on their murky balance sheets and getting them to behave (and lend) in a way consistent with public policy goals. Yet when the mere rumor of such plans on Pennsylvania Avenue was bruited last week, the Dow plunged dramatically, prompting Obama’s spokespeople to rush forward and insist that nationalizing banks was not on the agenda.
It should be, though.
The TARP passed last fall has been a disappointment to almost everyone, as Hank Paulson went about handing out money with no concern for accountability, and the financial sector went on about business as usual. The proposals thus far from Timothy Geithner, now occupying Paulson’s old office at Treasury, are only marginally more credible. For instance, he wants to swap some of the government’s equity stake in big institutions like Citicorp from preferred stock to common stock—which would give the taxpayers a voting voice on management decisions. Yet he’s hastened to assure everyone that this doesn’t mean Uncle Sam will wind up taking a majority stake, or calling the shots.
It should be, though.
I can understand the reservations from both sides. To some on the right, the very word “nationalization” evokes Communism, the spectre of banks being taken over at gunpoint by tinpot third-world kleptocracies. To some on the left, it raises worries of a shell game, in which the taxpayers will “take over” all the bad debts, then hand clean shiny profitable institutions back to rich shareholders at no cost to them.
Both of these versions are, of course, worth avoiding. But there’s a more rational approach that can and should work. The way to do it was summarized very effectively in the pages of The Nation:
The more promising path is for government to take charge of the system. This approach—call it “supervised workouts” if “nationalization” sounds too scary—would be more efficient than handing over more billions to failed bank executives and asking them to do the right thing. The government should liquidate the troubled big banks (along with the arcane financial instruments that led to their downfall), sell off their parts to healthier enterprises and let the shareholders eat the dust. Scarce public capital can meanwhile be used to fashion a new banking system, built around the thousands of smaller banks and financial firms that respect their obligations to the broader economy by investing in production and jobs. It will take some years to do this, and government will temporarily have to fill in the blank spots in the credit system that are not functioning, but it’s probably the only way out.
It worked for Sweden in the ’90s, and with appropriate safeguards to avoid the extremist scenarios sketched out above, it would work here. It even averts the worst of the “moral hazard” arguments so prevalent these days—the greatest costs wind up being borne by the players who chose to take those risks in the first place. (Remember, most traditional banks are decently capitalized, and on average have actually increased lending over the past year. The thing is, “traditional banks” only account for about 30% of credit in today’s economy, far less than they used to—and it’s with the rest, with the investment banks, the private capital and securities markets… with Wall Street… where the real problems lie. That imbalance needs to be corrected.)
The thing is, we’re wasting time rather than acting on this, because right now Wall Street is standing in the way—even if only by holding a gun to its own head (in the form of the Dow) and threatening to shoot if Washington doesn’t back off.
Of course, the only thing that would actually make Wall Street happy would be to continue to shovel vast sums of money its way with no strings attached. The Obama administration shouldn’t fall for this kind of extortion, and frankly can’t afford to. Without serious corrective action in the larger economy, the stock market has nowhere to go but down anyway. Really, Wall Street should appreciate the concept—it’s always embraced it in the past!—that he who supplies the capital calls the shots. And right now, that’s you, me, and all our fellow taxpayers.Tags: Alan Greenspan, banking, economy, financial crisis, nationalization, Obama, Paul Krugman, Timothy Geithner